Once again, this is a non-political blog, so the title hereof has nothing to do with a certain Cabinet Secretary-designate. Rather, it concerns some documents disclosed in an ongoing discovery melee that petitioner claims were privileged when revealed by IRS, but privilege was later waived, and IRS claims their experts didn’t rely on the documents in their reports, and anyway petitioners’ main objection was relevance, and that’s admissibility, not confidentiality.

Judge Buch has the Beekman Vista – Dynamo Holdings dynamic duo, in Dynamo Holdings Limited Partnership, Dynamo, GP, Inc., Tax Matters Partner, et al., Docket No. 8393-12, filed 12/21/16.

The duo want IRS’s experts precluded. No, says Judge Buch, in a designated hitter.

Eleven documents from the “Quick Peek” and predictive coding muddle slipped through the cracks and IRS’ experts got a look.

The duo want preclusion of reports and experts. IRS says the punishment is excessive.

Judge Buch engages in the usual “somber reasoning and copious citation of precedent.”

And in the end, the sanction must be proportionate to the offense.

“Striking or excluding respondent’s experts is not warranted. Petitioners strain to identify any harm they suffered. The only harm they claim to have suffered is an effect on their ability to cross-examine the experts, but even that description is vague and unconvincing. This is particularly true when privilege claims as to most of the documents were withdrawn; the claimed reason for the clawback of most of the documents was a lack of relevance. It is unclear how the production of irrelevant documents to respondent’s experts could adversely affect the cross-examination of those experts. Any exploration of the extent to which the experts might have considered the improperly produced documents can be (or could have been) explored during the depositions of the experts. And, if necessary, the Court can give latitude to petitioners when cross-examining experts during trial. In short, it is not clear that any harm has been suffered by petitioners, and to the extent they may have been harmed, the remedy sought is grossly out of proportion to the hypothetical harm they might have suffered.” Order, at p. 7. (Footnote omitted, but read it; IRS’ counsel promptly gave notice to the duo and destroyed the documents).

But the duo claim that if the Court doesn’t slam such conduct, who will comply with discovery orders? And that goes to the integrity of the whole process.

True, says Judge Buch. It’s not only the duo, but the system that needs protection.

But.

“When a party fails to comply with the Court’s orders, the integrity of the judicial system is implicated even when the opposing party is not prejudiced by the conduct. The Court expects parties and their counsel to abide by its orders. When a party fails to abide by the Court’s orders, several questions arise. Did the party violate the order intentionally or mistakenly? If mistakenly, was the party careless or reckless? And is there a pattern of noncompliance beyond the specific case in which the current violation occurred? These types of questions relate to how serious the party is about complying with the Court’s orders. And they relate to the professional responsibility of the lawyers involved, either in their own actions or in their supervision of staff working for them. Troubling answers to these questions might justify the Court imposing a sanction on a party or on a specific counsel appearing on behalf of a party.” Order, at pp. 7-8.

But IRS played fair, and there’s no showing a pattern of noncompliance.

So no sanctions.

No, not the Kenny Rodgers – Don Schlitz cult classic. Neither is this a tale of taxes.

Rather, this is a tip of the battered Stetson to a well-known law firm that does more than litigate tax cases, herein and elsewhere referred to as The Jersey Boys.

A well-known professional gambler sought to break the bank, rather like “Bond…James Bond” in the 1963 spy classic, at a major casino.

He didn’t break the bank, but he broke the rules, and The Jersey Boys nailed him for $10 million-plus.

Here’s their story:

“On December 15, 2016, Agostino & Associates was successful in obtaining a judgment in favor of Borgata Hotel Casino & Spa against professional gambler Phil Ivey for $10.1 million. The case involved the use of marked cards at the game of Baccarat in a unique scheme known as “edge  sorting.” Because of the parties involved, the case garnered much national attention from its inception. Jeremy Klausner handled the case for the firm in the United States District Court for the District of New Jersey.”

If you check the details as more particularly bounded and described in the media, “edge sorting” involves memorizing the backs of cards. There was a short story from the 1920s involving a similar situation, called “Fallen Angels” as the backs of the cards in question showed pictures of angels (artfully marked).

Nothing new under the sun.

And move to reconsider if you blew it.

Judge David Gustafson outdoes even himself today in a designated off-the-bencher. Renee Sunyoung Lim, Docket No. 15130-15, filed 12/20/16.

Doc Renee is a dentist with unreported income from her Sub S (conceded), and a dubious capital loss on her rental condominium.  The sales price exceeds the purchase price, but Doc Renee claims a lot of improvements, which maybe she paid for when she mortgaged out a couple times (hi, Judge Holmes), but she isn’t sure on the stand and produces no paper.

Worse, her long-time preparer filed late for her and other clients of his during the year before the year at issue, claiming he got divorced.

However, he had some excuses (please do not try these on your clients).

“He mitigated his fault to Dr. Lim and minimized the value of filing returns on time, explaining to her that if you file your return late, the IRS is less likely to audit you–a rumor she said she had also heard from some of her acquaintances.” Order, at p. 5.

Apparently the other clients canned the dude, but Doc Renee stuck with him.

She handed over her financial info and told preparer to do his thing.

“He told her he would file it electronically. Mr. A did not file a [year at issue] return for Dr. Lim, and Dr. Lim then began to get letters from the IRS inquiring about her [year at issue] return. Dr. Lim  testified that she asked Mr. A what was going on. We accept that she did contact Mr. A, but her testimony as to the details of their conversation–i.e., that he assured her that the return had been filed, that he told her that the IRS often loses returns, and that when she asked him for a copy of her return, he said he could not give it to her because it had been filed electronically–are not credible to us, and we are unable to find the precise facts of that conversation.” Order, at p. 6. (Name omitted).

Definitely don’t try these excuses on your clients.

However, 25 months late, what purports to be a return, filed on paper and not electronically, bearing the paid preparer signature of a colleague of Mr A’s, and maybe the signature of Doc Renee (or maybe not), gets to IRS.

Doc Renee is fighting the disallowance of the Schedule E loss shown on that return. Doc Renee did a stip with IRS, and never contended the return wasn’t hers.

Doc Renee stalls around, but finally Judge Gustafson has had enough and Doc Renee’s testimony is insufficient.

But she might have papers. She relegated the entire pre-trial prep to Mr. A, claiming she only found him unreliable after months of ignoring IRS’ counsel’s communications and passing them on to Mr A unread.

OK, says Judge Gustafson, here’s a hint.

“It is also true that we denied petitioner’s counsel’s motion during closing argument to reopen the record to admit additional evidence. However, the additional evidence was not in the courtroom but was anticipated testimony of Mr. A. This motion was in effect simply another request for a continuance. We denied that motion. (However, we did so without prejudice to a timely motion (see Rule 161) to reconsider this opinion, reopen the record, and allow into evidence actual documents proffered with the motion. We do not say we would grant such a motion; instead, we would consider its merits at the time; but if Dr. Lim’s position is that with a little more time she could have carried her burden of proof, then she has one last chance to demonstrate that with a presentation of the actual proof.)” Order, at pp. 12-13.

Y’wanna draft the motion papers for them, Judge?

But as the dawn patrolling telepitchers say, “Wait! There’s more.”

If there’s a Rule 161 motion to reconsider, IRS gets a bonus.

“Here the parties seem to agree that petitioner acquired her condo for about $368,000 and that she sold it for $490,000. Without more, those figures yield not a loss of $205,053 (as Dr. Lim’s return reported) but a gain of at least $122,000. Of course, that result could be affected by proving that one could add, to the cost of initially acquiring the condo, subsequent capital costs for improvements. But Dr. Lim failed to so prove. Respondent did not plead the greater deficiency that would result from determining gain on the sale, but rather simply defended the NOD’s disallowance of the loss. We sustain that disallowance.” Order, at p. 13. (Emphasis by the Court.)

If there’s reconsideration, shouldn’t IRS get to put in the greater deficiency (with burden of proof)?

Finally, there’s the dubious tax return. Doc Renee has none of the Section 6664 ducks for the chops. But Judge Gustafson has one…definitely maybe.

“During closing argument after trial, we raised with respondent the question whether, if Dr. Lim did not sign the return, then perhaps it might not have been her return; and section 6664(b) provides that the accuracy-related penalty applies ‘only in cases where a return of tax is filed’. However, neither Dr. Lim nor her counsel initiated argument on that issue nor took it up after the Court raised it. Moreover, while it is true that a return not signed by the taxpayer is not valid, see Mohamed v. Commissioner, T.C. Memo. 2013-255, it is also true that in some circumstances (such as a joint return) a taxpayer may file a return by ‘tacit consent’, see Reifler v. Commissioner, T.C. Memo. 2015-199, part II.C, or may ratify an unsigned return, see Harris v. Commissioner, T.C. Memo. 2009-26, n.3; and it is also true that a taxpayer like Dr. Lim might be equitably estopped from making a contention, see Reifler v. Commissioner, T.C. Memo. 2013-258, that contradicted her prior behavior and the positions she took.“ Order, at p. 16.

Fascinating, but it avails Doc Renee not.

“In any event, respondent was genuinely surprised by the Court’s raising this issue; and if after trial petitioner had moved for leave to amend her petition to state as a defense to penalty that she had not signed the return, then the motion would have been denied as unfairly prejudicial to respondent. We therefore do not consider that issue now.”  Order, at pp. 16-17.

Surprised? I wouldn’t have been surprised if counsel said “Whiskey Tango Foxtrot! She was fighting a disallowed loss on the return. If it wasn’t her return, why was she fighting the disallowance?”

And Judge, please oblige me by calling a Statutory Notice of Deficiency a “SNOD,” and a Notice of Determination (whether CDP, 501(c)(3), SS-8, or whistleblower) a “NOD.” Makes it clearer. Thanks.

Or, “Tell The Judge I’m Busy – Twice”

Apparently partner other than tax matters partner Bruce Eileff doesn’t read my blog, but I don’t feel like the Lone Ranger, because he apparently doesn’t read Judge Chiechi’s orders, either.

For the backstory on Bruce and his counsel, see my blogpost “Tell The Judge I’m Busy,”11/15/16.

Well, did Bruce and counsel bestir themselves, do the numbers, and hand in the result of their lucubrations at their Rule 155 beancount?

Negatory, good buddy.

Here’s Judge Chiechi, patient as Job, although her patience is wearing a wee bit thin. The case is still Taishan Investments, LLC, Bruce Elieff, Partner Other Than The Tax Matters Partner, Docket No. 8404-13, filed 12/20/16.

The parties report their status, in part, thus:

“5. Petitioner Elieff informed his counsel today that he has been tied up with three arbitrations in the past month and will start reviewing the proposed closing agreement this week.

“6. Petitioner’s counsel contacted Petitioner Elieff’s CPA on December 16, and December 19, 2016. The CPA estimates that he will probably finish reviewing the closing agreement by this week, and he will be on vacation next week.

“7. The CPA expects to work with Respondent when he returns to work to review the numbers in the closing agreement.

“8. Petitioner’s counsel expects that the review of the closing agreement can be finished sometime in late January, 2017, absent any disagreements on the terms.” Order, at p. 1.

“It appears to the Court that neither petitioner or petitioner’s counsel places a priority on finalizing the closing agreement. As far as the Court is concerned, petitioner should have spent his time reviewing the closing agreement sent to him, instead of spending his time on three arbitrations. Moreover, the Court does not understand why it will take almost a month for the CPA, petitioner, and respondent’s counsel to verify the computations relating to the closing agreement.” Order, at pp. 1-2..

Now as for the CPA going on vacation, I don’t fault him/her, as shortly I will be going on an extended vacation. I’ve thoroughly cleared my desk in anticipation thereof, and propose to be incommunicado for a couple weeks (hi, Judge Holmes, I’m going to miss your colloquialisms).

But as for Bruce and counsel, it would behoove them to put the pedal to the cliché.

Judge Chiechi wants a status report a week from today in her hands, and the latest excuses don’t cut it.

“…petitioner’s counsel shall explain in detail why the closing agreement will not be finalized before the end of January 2017. In this connection, the Court will not accept as good cause the reasons set forth in the joint status report that the parties filed….” Order, at p. 2.

Lest anyone mistake my view, I firmly believe in continuing professional education. I want to learn something of use, both professionally and personally, every day; I hope that in some cases my readers will take the will for the deed.

Howbeit, as this year draws to its cliché, I am bombarded by pitches from alleged CPE providers, intimating dire consequences if I don’t cough up.

I sent off an e-mail to Office of Enrollment to request clarification, after trying their phone number, which is useless.

I would make a political remark about IRS funding, but this is a non-political blog; there are enough toxic waste sites, and I am sure there will be a lot more without any additions from me.

How much of the stuff the CPE-floggers put out is of use? A few are valuable; without naming names, education tax credits and tax issues in divorce have helped. But the tenth course in “choosing an entity for the small business” is neither instructive nor amusing.

But obviously there’s money in it. Hence the title of this rant.

Getting it wrong is bad enough, when you can correct it. But when you can’t, things get much worse.

Suzanne D. Oster Ozimkoski, 2016 T. C. Memo. 228, filed 12/19/16, lets Judge Paris show us how bad it can get.

Suzanne’s husband dies, leaving an IRA with $235K in it. Suzanne is ex’r and beneficiary named in simple will done by a “small, local ‘full service law firm.’” (2016 T. C. Memo. 228, at p. 3, footnote 4).

I’m sure my ultra-sophisticated readers have just asked “and who was the beneficiary of the IRA?” We all know that wills can’t change IRA beneficiaries.

Well, Suzanne isn’t. So when a fracas arises between Suzanne and Junior (son of deceased spouse), trustee freezes the IRA, until the litigation is settled. Then trustee rolls IRA over to Suzanne, who draws down to pay Junior the settlement (cash plus a Harley), and draws again for herself.

Judge Paris finds under FL law that, where there is no beneficiary, or where the estate is the beneficiary, the IRA goes to the estate. Trustee had no basis for freezing the IRA, which should have gone to the ex’r. Especially since trustee couldn’t find the beneficiary designation.

The trustee (Wells Fargo’s predecessor Wachovia) had other problems, but we’ll skip those.

Since apparently spouse died before distributions were required to be taken, IRA must be distributed within five years to estate, as there is no beneficiary. As surviving spouse Suzanne wasn’t named beneficiary, distributions are taxable.

And the 10% thingy is on the table as well, Suzanne being under 59-1/2 years of age at the time.

“Under Florida law Wachovia should have distributed the IRA assets to Mr. Ozimkoski, Sr.’s estate because either it was named as the beneficiary or there was no named beneficiary and because the settlement agreement makes no direction as to the disposition of the IRA.  Although the Court finds that Wachovia incorrectly rolled over Mr. Ozimkoski, Sr.’s IRA to petitioner’s IRA, the Court has no jurisdiction to unwind that transaction and must decide petitioner’s tax liability on the basis of Wachovia’s erroneous transfer of Mr. Ozimkoski, Sr.’s IRA assets to her IRA and the subsequent distributions from her IRA.” 2016 T. C. Memo. 228, at pp. 11-12.

It’s real bad for Suzanne, but for the “small, local full service law firm,” supra, it gets worse. The attorney knew there would be taxes to pay. “Wachovia’s employee journal notes state that petitioner’s probate attorney understood that someone would have to pay income tax on the $110,000 allocated to Mr. Ozimkoski, Jr., under the terms of the settlement agreement. “ 2016 T. C. Memo. 228, at p. 12 (Footnote omitted, but Judge Paris says it’s unclear if the attorney included the estate as being liable.)

“It is unclear from the record before the Court how petitioner’s probate attorney counseled her to comply with the payment obligation under the settlement agreement–as the personal representative of Mr. Ozimkoski, Sr.’s estate, as an IRA beneficiary, or as a surviving spouse.  What is clear from the record before the Court is that petitioner’s probate attorney failed to counsel her on the full tax ramifications of paying Mr. Ozimkoski, Jr., $110,000 from her own IRA.  While the Court is sympathetic to petitioner’s argument, the distributions she received were from her own IRA and therefore are considered taxable income to her….” 228 T. C. Memo. 228, at pp. 13-14. (Footnote omitted, but all Suzanne was arguing about was the $110K to Junior, so she waived the draws she took for herself.)

Maybe she wouldn’t have been better off if the estate paid the $110K and the tax, but for the passage of time.

Suzanne beats the 20% accuracy penalty on the tax on the $110K because she had limited education and relied on Wachovia and her lawyer. Her own draws are her problem.

But the takeaway is essential: make sure there’s a named beneficiary for every IRA and update it. And watch rollovers and distributions. Really carefully.

This is a sad story. A partnership made money and this partner had a distributive share. But rather than take it and pay tax, he chose to let the partnership use the money to pay expenses. He claimed NY partnership law required him as a fiduciary to advance the interests of his fellow partners and not abandon them.

His tax advisers told him that, although unfair, he owed the tax. He said he was prepared to face the consequences.

Judge Gustafson can’t oblige as to letting him off the tax, but can oblige by letting him face the consequences.

He owes the tax and the five-and-ten chop. The capital contribution to the partnership adds to his basis, but isn’t deductible.

His attempt to shield his spouse is not on the table, as it’s for her to file innocent spousery.

Curious why, if the partnership was in such dire straits, he didn’t get his share of offsetting deductions. But there’s a Section 155 beancount to follow, so maybe there’s a silver lining.

And maybe if the partnership goes under he has a capital loss.

The case is Walter S. Mack, Jr. and Consuelo C. Mack, 2016 T. C. Memo. 229, filed 12/19/16.

No, not a Dash Riprock “Liars’ Poker” ploy from Michael Lewis’classic.

Today we look at Silver Medical, Inc., 148 T. C. 18, filed 12/19/16. Silver wanted a triple-dip on some unguided Congressional largesse to inventors of therapeutic devices from Section 48D, a section added by  Affordable Care Act of 2010 (which itself needs some therapeutic devices, but this is a non-political blog).

If the device made the cut with Treasury and HHS, one got either cash or credit to the extent of 50% of allowable expenditures in each of 2009 and 2010. There were clawbacks if too many applicants asked for the goodies, or if there were disallowances of goodies previously granted because applications were due and had to be processed before end of 2010, so no one knew final numbers. The clawbacks were treated as tax.

Silver was cute. They took a short year in 2010, so that they had three tax years in 2009 and 2010; 2009 was one year; 2010 short and 2010 long were the others, and the magic language in Section 48D(b)(5) talks of tax years beginning in 2009 and 2010. Thus, by shorting 2010, Silver had two years beginning in 2010, so they could use almost all of 2011 to grab more.

Aside from being a case of first impression as to a statute that has timed out, this is an example of gameplaying that doesn’t get it with Judge Vasquez.

Silver got certified for its expenditures before choosing to go short. When it got its short approved, it tried to get recertified. IRS didn’t certify. Instead, it hit Silver with a SNOD.

Silver claims “tax years beginning” means “tax years beginning.” Plain language, giving effect to every word, and all that jazz.

Judge Vasquez cuts to the chase. “We need not and will not address petitioner’s argument in resolving the instant case.  We focus on respondent’s alternative argument and recognize that even if Congress did intend to allow taxpayers like petitioner to make qualified investments over three tax years (an issue we decline to decide), petitioner did not actually receive certification to do so.” 147 T. C. 18, at p. 10.

Administrative nullification? IRS can thwart what seems to be someone taking advantage of sloppy language in the famous 3200-page enactment by doing nothing.

Judge Vasquez is down with that.

Now as for when the clawback of overpaid largesse happens, that happens immediately after the grant was made, as if it had never been made.

OK, says Silver, the grant was made in 2010, therefore the clawback applies to that year.

No, says Judge Vasquez.

“In determining that the grants were made on separate dates, we focus primarily on the fact that the grant funds attributable to each year were paid on separate dates.  The terms of the QTDP program provide that grants for tax years beginning in 2009 will generally be paid no later than October 29, 2010, and that grants for tax years beginning in 2010 will generally be paid within 30 days of the last day of the 2010 taxable year.  See Notice 2010-45, sec. 8.02(6) and (7), 2010 23 I.R.B. at 738.  We believe that the payments for each tax year are sufficiently distinct to warrant a finding that the underlying grants are separately ‘made’ in each year when paid.” 147 T. C. 18, at p.13.

The letter granting certification mentioned the clawback, so nothing was final until after year-end. Applications were due in July, 2010 and IRS had to accept or reject by October. Approving the grant did not result in an unrestricted right to a fixed grant amount. So the final grant became effective at the beginning of 2010, and the 2011 items are off the table.

I give Silver a Taishoff “Good try, First Class.”

Howard Feinberg & Gail Feinberg are in Tax Court today, having been tossed for failing to cough up the sixty bucks but now having raised the cash.

A quick docket search reveals that Howard & Gail are pro se. OK, most TC petitioners go pro se. There’s no requirement for them to retain counsel, and Tax Court certainly can’t appoint counsel (except sometimes; see my blogposts “Assigned Counsel?” 1/6/16 and “Assigned Counsel? – Part Deux,” 1/28/16).

But here’s the twist. Having reached a “no change” deal with IRS, having the sixty bucks ready to send in to Ch J L Paige (“Iron Fist”) Marvel, and wanting to submit a stipulated decision, they need a vacation…of Ch J Iron Fist’s earlier order tossing them for nonpayment. And they do it in this wise: “…a Letter… by Terry R. Fyffe on Behalf of Petitioners. In that letter, petitioners (1) state that they and the IRS have reached a “no change” agreement and (2) request that this case be reopened so that the parties’ stipulated decision may be submitted for the Court’s consideration. The letter was accompanied by payment of the Court’s filing fee.” Order, at p. 1.

Sound like a motion per Rule 162 to you? Well, it sure did to me. And Ch J Iron Fist agrees, and recharacterizes the Letter as a 162 motion.

The order doesn’t state whether Howard & Gail signed the letter. If they did, why mention who wrote it?

But if they didn’t, how do non-USTCPs or admitted attorneys go making motions?

Has Rule 200 been superseded? Or is Terry R. Fyffe an unusually modest USTCP or admitted attorney, who hides his light under a cliché? A quick on-line search turns up a website for a firm of CPAs, in which one Terry R. Fyffe is stated to be a founding member. But the site doesn’t state that Terry R. is a USTCP or an admitted attorney.

Ch J Iron Fist sidesteps the issue, holds the letter-cum-motion in abeyance until she sees the stipulated decision, and then will “take appropriate action.”

So people pay a fee, undergo a brutal examination, with an infinitesimal passing rate, and get sponsors, to become USTCPs. And the rest of us lawyers send in the thirty bucks, and take no exam. But if we appear without having filed Entry of Appearance, we get a smart right-about-face and get told to file one.

However, CPAs apparently need do none of the above. Section 7452 provides that “(N)o qualified person shall be denied admission to practice before the Tax Court because of his failure to be a member of any profession or calling.” But the immediately preceding sentence in Section 7452 says Tax Court can make rules about representation of petitioners.

I must have missed that one.

In my young day, traveling on Canadian Pacific Rail, I heard a no-doubt-apocryphal tale of a traveler who encountered a bedbug in a CP sleeper. In response to his furious letter to the high command, he received an abject apology, in the most fulsome terms. But the typist (I told you this was in my young day) left in the envelope the High Commander’s note: “Send this dope the bedbug letter.”

I bear the admonition in mind like the famous “torch in flame.” The form file is not infallible. Read the document carefully before you sign it, send it, file it, mail it or deliver it.

Today we see what happens when one doesn’t.

Jeffrey S. Monaghan is apparently deceased, and Martha J. Monaghan, co-petitioner, is asked to provide letters testamentary, letters of administration, or some kind of judicial decree appointing an executor, personal representative or fiduciary to represent the late Jeffrey’s interests.

Ch J L. Paige (“Iron Fist”) Marvel warns what will happen if Martha doesn’t do so.

“Failure to comply with this Order may result in the granting of respondent’s motion and dismissal of the instant case in part as to X [sic], Deceased, or other appropriate action by this Court.” Jeffrey S. Monaghan & Martha J. Monaghan, Docket No. 22063-15, filed 12/16/16, at p. 1.

And STJ Daniel A. (“Yuda”) Guy has another one for us. Morris Gaines and Madeline Gaines, Deceased, Docket No. 5597-16S, filed 12/16/16. And this time IRS’ counsel goes astray. “… respondent filed a document titled ‘Motion to Appoint Tax Matters Partner’. This motion is incorrectly titled and is in the nature of a motion to substitute parties and change caption.” Order, at p. 1.

While Morris and the late Madeline may have been partners in life, TEFRA has nothing to do with it.

Takeaway—There but for the grace of you-know-Whom goes any of us.